Brokers are giving star fund manager Neil Woodford's new venture an unprecedented
spate of promotion and publicity, but the hype surrounding his new business
is disturbing, says Richard Dyson

Successful professional investors are often celebrated and lionised, especially when they have large numbers of private investors among their customers. It is easy to look back at a fund manager’s record and say: “He was a star.”

It is much more difficult to stand at any one moment and, looking ahead, say: “He will be a star.”

The statement all investment advertisements are required to include – that “past performance is not a guide to future returns” – is true. You could say a fund manager is disciplined, highly consistent and knowledgeable about the stocks they own, but identifying those characteristics, if indeed you can, is about as close as you can get to predicting their future success.

I raise the subject because along with the launch of Neil Woodford’s new investment business – you will have read about it in our pages – has come an unprecedented and astonishing spate of promotion and publicity. I cannot remember any investment being as widely heralded as Mr Woodford's new venture.

Much of the promotion has nothing to do with his own business, Woodford Investment Management. The noise is being made mainly by brokers and other middlemen who hope to profit through selling his investments to their clients.

Such is his status as an investor that he does not have to sing his own praises, even very modestly. Others queue up to do it for him.

And there is no doubt Mr Woodford’s long-term record puts him in the pantheon of investment greats. His most celebrated portfolio, Invesco Perpetual High Income, delivered a 2,200pc return in the 25 years he oversaw it, trouncing both the wider market and rival investment funds. He proved himself again and again.

He avoided the craze for technology and media stocks and spared his investors the huge losses of the early Noughties. He divined the oncoming banking crisis later that decade and acted on his fears in the way few others did. He is immensely respected in the City, was given a CBE in 2013 for services to the economy, and was cited by a leading financial academic as the “ideal fund manager” in a government-commissioned report.

But the hype currently surrounding his new business is disturbing.

Whenever a new investment is thrust to the fore – be it based on a celebrated portfolio manager or a new theme, geographic region or industry sector – more basic questions are overlooked. Here are three.

1. Why are you trying to pick an individual fund manager?

The answer is so that you can beat the returns made by the wider stock market. And if you could be certain of picking with success, you’d be on to a winner. But the chances of your picking such a manager are very slim. Most fund managers don’t beat the wider market, and the longer the timescale the fewer the winners. Even when fund managers do appear to beat the market over long periods, the chances of your actually investing with them during their “good years” are even slimmer.

In an excellent book, Smarter Investing by Tim Hale, published a decade ago but still available, another celebrated fund manager is discussed: Anthony Bolton of Fidelity, famed for his Special Situations portfolio.

In the 25 years between 1979 and 2004 Mr Bolton beat the wider market’s returns by an average 6 percentage points a year, an astonishing achievement and a huge benefit to investors who stayed the course. But, as Mr Hale pointed out, very long periods of underperformance within that 25 years caused many savers to defect. Mr Hale reckoned that by 2004 more than half the fund’s 250,000 private savers had invested for five years or less. “Very few” had held the fund since 1979. Most, then, would not have benefited in the way the returns over longer periods indicated. That leads to question number two.

2. How will you decide when to dump that manager if their performance is poor?

This is a question I’ve never heard satisfactorily answered. Say you were invested with Mr Woodford during the few years before 2000 when technology stocks were driving the market upwards and he was stubbornly holding off. Of course, with hindsight, everyone applauded his caution. But to stick through that period all but the most devoted would have had their faith severely tested.

And although Mr Woodford’s long-term record is excellent, in recent years it has not been so remarkable. Over the past five years High Income has returned an annual 14.7pc, compared with the average UK-invested fund’s 14.3pc. Only over 10 years does Mr Woodford’s performance really push him ahead.

3. Does investing in a new fund fit into your long-term plan?

As I have written here before, beware the “buy, buy” mantra of investment brokers who candidly refer to themselves as supermarkets with more interest in sales than in helping customers plan or build portfolios.

When Tim Hale wrote Smarter Investing, the final – and disappointing – chapter in Anthony Bolton’s investment career was yet to come. After his great success running the UK Special Situations fund, Mr Bolton took a new direction, launching the Fidelity China Special Situations trust in 2010. Private investors poured in their money. Did they do so because they wanted exposure to China as part of their wider investment planning? Or because they wanted some of the Bolton “magic”? I’d suggest many were spurred by the latter motive, encouraged by the huge promotion of the fund by brokers, who at that time were still paid commission.

Four years later the original investors in Mr Bolton’s China fund are still nursing a loss.

Of the many successful private investors I’ve spoken to over the years, the most interesting and admirable are those who have developed their own philosophy. They regard brokers and brokers’ information with just suspicion. They tend to have evolved a clear idea of the asset mix that is right for them, and built their own process of selecting and overseeing the funds or shares giving that exposure. Most would run a mile at the thought of buying the latest best thing. Many may not have beaten the wider market by much, if anything, but they have the reassurance of sticking to their own philosophy, rather than being carried along by sales patter.